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Why It Matters

Brexit aftermath: Rating cuts may cripple United Kingdom

Credit rating agencies ripped up Britain's coveted triple-A rating on Monday, backing up what they had previously warned over the consequences of a vote to leave the European Union.

Standard & Poor's slashed Britain's rating by two notches, taking the country out of the exclusive but shrinking triple-A group consisting of Germany, Singapore, Australia and Canada, among a handful of others. Fitch has also lowered its ratings from AA+ to AA, forecasting an "abrupt slowdown" in growth in the short term.

Moody's, the third major agency, has so far kept Britain on its second-highest rating, but it too has warned that a Leave vote could trigger a downgrade.

The cuts to Britain's credit rating are more than just a body blow to the economy, which is likely to enter into a recession in the coming months.

 

They could seriously cripple Britain by making it more expensive for the country to borrow, a prospect made more worrying with tax revenues expected to drop further.

The United Kingdom has done remarkably well to reduce its public debt since 2009. Public sector net debt stood at £1.594 trillion (S$2.9 trillion) at the end of March, the equivalent of 83.5 per cent of gross domestic product (GDP). In 2009, net debt to GDP stood just above 150 per cent.

But the Budget deficit has continued to grow, reaching £74 billion for the 12 months to March 31.

The numbers are expected to be even worse for next year's Budget.

It all paints a gloomy picture for the British economy. In fact, if Britain enters into a recession, the only question is how deep it will be and for how long. Even if it does manage to get out of recession, it may not be easy for the country to earn an upgrade back into the club of triple-A rated countries.

It will have to find some way to strengthen its balance sheet by either cutting spending or raising tax revenue, and reduce political uncertainty to induce investment into the country again.

A formidable task, made all the more challenging by the fact that Britain will have to do it alone.

A version of this article appeared in the print edition of The Straits Times on June 30, 2016, with the headline 'Rating cuts may cripple UK'. Print Edition | Subscribe